In our last review of mid-market health in North America, we celebrated local businesses staging the strongest comeback of any of major region in the world. In our latest set of results for H1 2021 the business outlook continues to power upwards, rising from 55.9 to 66.3 in H1 2021. This is both a personal best for North America and the highest of any region monitored by some margin. All the underlying elements of the outlook surged during the period, but it was economic optimism that set the pace with 82% of mid-market companies in the region feeling optimistic about their economies.
As before, US businesses recorded the highest levels of optimism, reflecting the momentum of the world’s largest economy, and the progress with vaccines that is supporting confidence all around the world. “In the US, there is a full-throated roar coming from businesses. It’s a classic U-shaped recovery with growth levels that we haven’t seen since the 1970s,” says Mike Ward, global head of advisory at Grant Thornton International Ltd.
The story is nearly as positive across the border in Canada, with Jean-Philippe Brosseau, senior director - management consulting at Raymond Chabot Grant Thornton, highlighting a rebound in all the national economic indicators in the last few months.
Revenue and profitability expectations in the region also rose notably, with 63% and 65% of mid-market companies respectively now expecting increases in the next 12 months – up 13 percentage points (pp) and 9pp. In both cases the H1 2021 levels were the highest since 2018.
There is an important twist to this story. Grant Thornton’s unique Global business pulse not only monitors the outlook of mid-market companies but also the restrictions – the barriers to their growth. Interestingly, the index shows that as the outlook has improved dramatically, the restrictions have significantly worsened (See below chart). This dynamic is also seen in the global results, but the scale of the simultaneous positive and negative changes in North America is particularly pronounced.
Restrictions worsened from -53.8 to -64.3 during the first half of 2021 – almost exactly mirroring the scale of the improvements in outlook – and halting any further improvements in the overall index score. This remained unchanged at 1 in H1 2021, making it the only region in the Global Business Pulse not to show improvements in health this year.
Supply concerns are now the biggest barrier to growth
Present levels of restrictions are easily the highest ever seen and going forward they will certainly weigh – to some degree – on further improvements in the outlook. The rise is linked to escalating concerns among businesses about supply constraints which are now the single biggest barrier to growth – overtaking the previous nervousness about demand and economic uncertainty.
These supply concerns range across shortage of finance (up 14pp), energy costs (up 22pp), transport infrastructure (up 23pp) and regulation and red tape (up 16pp), but are particularly elevated around labour – specifically the availability and cost of workers. The percentage of businesses identifying concerns about availability of skilled labour has now reached 68%, or 20pp higher than in H2 2020 (US: 69%, Canada: 56%). While the percentage with concerns about cost of labour has reached 65%, up 16pp.
“In Ontario and Quebec (two of Canada’s biggest provinces), the big talking point in the last few weeks has been the shortage of labour,” comments Jean-Philippe. “Across Canada, recent data has shown that we have more than 600,000 jobs available right now, and the shortage of labour is having a big impact on small and medium enterprises across industries.”[i]
In both the US and Canada, our leaders note that government support measures have been discouraging some people from re-entering the job market. Hopefully as these are wound back and border restrictions begin to ease, the supply should improve. But companies should do more than just wait, particularly with the likelihood of continued economic recovery adding to demand. They must widen the pool of talent and embrace remote hiring and working.
Scott Farber, network capabilities team regional head for the Americas at Grant Thornton International Ltd., says he has recently witnessed the recruitment of technology experts in Argentina by one US company in search of skills. “I think we are going to see many more US companies engaging Latin American workers directly or moving back-office functions into shared service centres in low-cost countries.”
These supply constraints significantly increase the risk of inflation. This danger is already seen in recent inflation data for the US, which showed rates reaching 5.4% - the biggest jump since 2008.[ii] “For sure there is some concern about inflation, even if for now the Bank of Canada[iii] and Federal Reserve[iv] are saying it is under control. If all businesses have to increase wages because of the labour shortages, this will have an impact on inflation,” says Jean-Philippe.
The inflationary pressures in the mid-market are apparent in Grant Thornton’s global research. On the cost side, planned salary increases went up sharply in H1 2021, with 36% of North American companies planning to increase salaries by more than inflation; while on the sales side, we also see elevated numbers of companies planning to increase selling prices in the next 12 months – now 52%.
Mike wisely comments that “there is no more obvious investment for return now than productivity improvements that ease the acute shortages in labour, global resources and the supply chain.” And to their credit, mid-market businesses in North America are doing just that.
All components of investment increased in H1 2021, with intentions rising in tandem with improvements in business conditions. However, there is a noticeable difference between the proportion of firms expanding capacity through plant & machinery (53%) and new buildings (50%), and the proportion of firms investment in employee skills (66%), R&D (64%), and new technology (69%). This latter group is focused on productivity improvements which help companies do more with less resources.
Scott notes, “The ones that are able to adopt technology in a meaningful way to increase their productivity are likely to grow faster than companies that are more manually intensive.” He adds: “Investment in training is something that companies are going to need to do because they are going to struggle to find the exact skillset they’re looking for compared with three years ago.”
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i. www.cicnews.com - High job vacancies in health care and food services in Canada - 02.08.2021 ii. www.cnbc.com - Inflation climbs higher than expected in June as price index rises 5.4% - 13.07.2021 iii. www.bloomberg.com - Bank of Canada Chief Warns Against Overreacting to Hot Inflation - 29.07.2021 iv. www.ft.com - Jay Powell dismisses claims of Fed complacency on inflation - 14.07.2021
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